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CA Intermediate · Auditing and Ethics · Risk Assessment and Internal Control

While auditing Kaveri Textiles Ltd, the auditor identifies that the company's CFO has a history of overriding journal-entry controls near quarter-end to meet analyst expectations. Under SA 240 and SA 315, how should the auditor treat the risk arising from management's ability to override controls?

Management override of controls is always treated as a significant risk of material misstatement due to fraud in every audit. It cannot be rebutted by an internal audit department or audit committee, so the auditor must test journal entries, review estimates for bias and examine unusual transactions.

  1. AAs a significant risk of material misstatement due to fraud that is present in every audit, regardless of the auditor's past experience with the entityCorrect
  2. BAs a risk that can be rebutted if the company has an internal audit department
  3. CAs a control risk that is addressed only by relying on the company's audit committee
  4. DAs an inherent risk that needs attention only if the entity is listed

Explanation

SA 240 requires the auditor to treat the risk of management override of controls as a significant risk of fraud in every audit, as it cannot be ruled out by the presence of other controls. The auditor therefore tests journal entries, reviews estimates for bias and evaluates unusual transactions. Rebutting it because of an internal audit function is not permitted.

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